Ottawa to allow working people to draw CPP cheques

The move was announced following a meeting between the federal Finance Minister Jim Flaherty and his provincial counterparts, in which pension issues emerged as a significant talking point.ReutersThe move was announced following a meeting between the federal Finance Minister Jim Flaherty and his provincial counterparts, in which pension issues emerged as a significant talking point.

OTTAWA — The federal government said Monday it is going to allow Canadians to work and draw on their Canada Pension Plan benefits at the same time – a move that analysts described as a “sea-change” in pension policy.

The move was announced following a meeting between the federal Finance Minister, Jim Flaherty, and his provincial counterparts, in which pension issues emerged as a significant issue.

Analysts say the changes proposed to CPP indicate policy makers are serious about the need to revamp Canada’s retirement-income scheme. “The more flexibility you build into pension arrangements, the better,” said Jack Mintz, public policy professor at the University of Calgary.

As it happens, Mr. Flaherty also used the meeting to warn Canadians that the budget deficit would be “substantially” larger than previously expected, due to weaker economic growth and tax revenue, with more detail to be provided next month in a special report to Parliament.

In the budget tabled last January, Ottawa projected a deficit of $1.1-billion for the fiscal year just ended, and a $33.7-billion shortfall for the current 12-month period.

Lost in the deficit warning, however, were the CPP policy changes that analysts say represent a “positive” step toward pension reform, and are meant to address the country’s ageing workforce and pending labour crunch.

“This is an important shift in public pension policy,” said Finn Poschmann, vice-president of policy at the C.D. Howe Institute, a Toronto-based think tank.

Chief among the changes is that Ottawa is going to allow Canadians to draw on CPP benefits early and continue working. Under the present regime, Canadians who opt to retire early, at 60, are required to quit their jobs and remain out of work for at least two months.

That will no longer be the case, starting in 2012. Individuals would be able to draw CPP benefits as early as 60 without leaving their jobs or reducing their hours.

According to a Department of Finance document, the change could help individuals use income from their CPP pension to “phase into retirement or supplement their earnings.”

However, this comes with a slight catch. Under the existing arrangement, CPP benefits are reduced by a small percentage for each month they are claimed in advance of the retirement age of 65. So those who begin drawing benefits at age 60 see a reduction of 30%. Under the new plan, that reduction would amount to 36%.

Nevertheless, the move represents a “positive development,” said Don Drummond, chief economist at Toronto-Dominion Bank, as it provides further options for Canadians in the tail end of their working careers. He said pension arrangements have been an impediment for those looking to reduce work hours or shift to part-time, because of the hit they would sustain to benefits earned.

Mr. Poschmann said current pension policy has too often rewarded early retirement, because the savings earned from not paying CPP contributions for five years outstripped the reduction in benefits. Further, it penalized people who wished to work longer and made flexible work arrangements near impossible.

“The proposed adjustments mark an important sea-change in government pension policy’s approach to dealing with population ageing and, in particular, making it easier for those people who want to work later in life to do so,” he said.

Another change is that people who are 65 and older who draw on CPP but continue to work can continue to make contributions to the federal plan, thereby boosting the amount of benefits received.

Also, the federal government is looking to reward Canadians who opt to delay drawing on CPP benefits. Individuals who wait until age 70 to earn CPP would see their benefits boosted by up to 42%, compared to the current maximum bump up of 30%.

“This will certainly encourage people to use CPP more as a savings vehicle,” Mr. Mintz said.

Finally, Ottawa will allow Canadians to drop an additional low-earning year from the equation under which pension benefits are calculated. It is meant to benefit those whose careers suffer “more work interruptions” than usual, the Department of Finance said.

The federal government said the changes could be accommodated at current contribution rates.

Also Monday, Mr. Flaherty announced a panel of federal and provincial policy makers would look into further changes to the country’s pension laws, to report to Ottawa with recommendations by year-end.

The Conservative government has just concluded its own pension consultation, which critics describe as Byzantine. Among the changes Ottawa is willing to entertain include lifting the limits on allowable pension plan surpluses to ensure they are sufficiently funded, examining and whether alternative pension designs – besides defined contribution and defined benefit – should be allowed.

Experts say pension matters are coming to the fore because markets recently tanked, the population is ageing and Baby Boomers realize they may not have enough retirement income.